The effect of budget deficits on exchange rates: Evidence from five industrialized countries

Beck, Stacie

doi:10.1016/0148-6195(94)90027-2

Cited by 6 publications

(3 citation statements)

References 24 publications

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“…Alternatively, international capital flows could transfer deficits' effects from interest rates to exchange rates. Beck (1994) investigates these alternative hypotheses by testing the significance of budget deficit and government spending changes on exchange rates in five industrialized countries. The estimation uses forecast data for the fiscal policy expectations variables.…”

Section: Literature Reviewmentioning

confidence: 99%

Credible Fiscal Policy and Exchange Rates Stabilization

Kuncoro¹

2015

JEDS

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This paper aims at analyzing the potential impact of fiscal policy credibility on the exchange rates stabilization. Motivated by the fact that empirical studies concerning this aspect are still limited, we take the case of Indonesia over the period [2001][2002][2003][2004][2005][2006][2007][2008][2009][2010][2011][2012][2013]. Based on the quarterly data analysis, we found that the impact of credible fiscal policy typically depends on characteristics of fiscal rules commitment. In one hand, the credible debt rule policy reduces the exchange rate fluctuation. In contrast, the deficit rule policy -which is incredible -does not have any impact on the exchange rate and thus does not support to the exchange rates stabilization. Given those results, we conclude that credibility matters in stabilizing foreign exchange market. Accordingly, improving the credibility of fiscal policy should be an integral part of the exchange rates stabilization program.

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Section: Literature Reviewmentioning

confidence: 99%

Credible Fiscal Policy and Exchange Rates Stabilization

Kuncoro¹

2015

JEDS

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“…For the Forward Looking Monetary Model, the expected parameters are b1 = 1, b2 < 0, b3 = 0, b4 = 0 [1], [4], [14]. According to conventional macroeconomic theory, expected parameters of reserve is b5 < 0 [26], [13] and fiscal balance is b6 > 0 [3], [25].…”

Section: Methodology and Datamentioning

confidence: 99%

Assessing Monetary Model of Exchange Rate Determination: Case of Indonesia

Hadiwibowo

Yasni

2020

EJBMR

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The main purpose of this paper is to assess the exchange rate determination in Indonesia after the Asian financial crisis. We use the Monetary Model to assess the prediction of the Indonesian Rupiah against the United States Dollar and other currencies of the largest trade partners of Indonesia. The models are the Flexible Price Monetary Model and the Sticky Price Monetary Model. We estimate short-run and long-run relationships using the Error Correction Model. The Monetary Model can explain partially the exchange rate variations, but the signs of money, income, and fiscal balance are not as expected. The causality may run from the exchange rate to money and price level.

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“…The literature offers conflicting evidence for the causal link between the current account and the budget deficit. Several studies regressed the current account balance and exchange rate on the fiscal balance to investigate the relationship between the two deficits (Ahmed, 1986; Beck, 1994; Feldstein, 1982; Mohammadi, 2004; Monadjemi & Kearney, 1991; Obstfeld & Rogoff, 1995; Winner, 1993). Studies like (Anoruo & Ramchander, 1998; Darrat, 1988; Enders & Lee, 1990; McMillin & Koray, 1990; Normandin, 1999; Rosensweig & Tallman, 1993; Vamvoukas, 1999) applied the Granger causality test utilising VAR and VECM model on time series data for assessing twin deficit.…”

Section: Literature Reviewmentioning

confidence: 99%

Impact of fiscal deficit and trade openness on current account deficit in India: new evidence on twin deficits hypothesis

Mehta

Mallikarjun

2023

ECON

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PurposeThis study aims to examine the impact of fiscal deficit, exchange rate and trade openness on current account deficit (CAD). The study tried to empirically investigate the ‘twin deficits hypothesis’ and ‘compensation hypothesis’ in the Indian context.Design/methodology/approachAutoregressive distributed lagARDL) bound test approach was used by taking annual time series data from 1978 to 2021. The estimates confirm a significant long-run and short-run relationship between dependent variables, i.e. CAD and independent variables such as the fiscal deficit, exchange rate and trade openness.FindingsThe results show that positive shocks of all explanatory variables significantly affect the CAD. CAD and fiscal deficit are significantly associated, as the coefficient of fiscal deficit is positive and significant. The study also found that exchange rate and trade openness significantly affect the CAD. The coefficients of exchange rate and trade openness are positive and significant. The findings show that an increase in CADs results from liberal trade policies that help domestic industries grow their trade and expansionary fiscal policy, leading to a higher fiscal deficit. The negative and significant error correction term suggests that short-run disequilibrium converges to long-run equilibrium at a speed of 19.2%. The findings validate the ‘twin deficits hypothesis’ and ‘compensation hypothesis’ in the Indian context.Practical implicationsIt can be inferred from the study that liberal policy to promote economic growth and trade openness should be designed and promoted judiciously. An excessive liberalised approach may impact other macroeconomic variables such as current account balances. Integrating the domestic market with global markets poses a big challenge for countries like India that aspire to penetrate global markets. Furthermore, the Indian policy makers should rigorously work and promote the policies such as Fiscal Responsibility and Budget Management (FRBM) as reduction in fiscal deficits, trade imbalances will also be reduced.Originality/valueThis study contributes to the existing literature on ‘twin deficit’ and trade openness by giving new evidence on the trilemma between designing sustainable fiscal policy by spending wisely without imperilling the country's global presence and CAD.

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The effect of budget deficits on exchange rates: Evidence from five industrialized countries

Cited by 6 publications

References 24 publications

Credible Fiscal Policy and Exchange Rates Stabilization

Credible Fiscal Policy and Exchange Rates Stabilization

Assessing Monetary Model of Exchange Rate Determination: Case of Indonesia

Impact of fiscal deficit and trade openness on current account deficit in India: new evidence on twin deficits hypothesis

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